Highest Paid CEOs: #3 Gregory Maffei

This is the third in a series of five articles, covering the top five highest paid CEOs in the U.S. Number three on the list is Gregory Maffei, CEO of Liberty Media Corp. (NASDAQ: LMCA) , who made $391 million in fiscal 2012, the latest year for which figures are available. While #1, Mark Zuckerberg at Facebook, and #2, Richard Kinder at Kinder Morgan, had a number of similarities – negligible salaries, billions of dollars in pay that was really not pay at all – Gregory Maffei's pay is simple, good old-fashioned excess.

Maffei's spider's web corporate network

Maffei came to the Liberty group of companies via Microsoft – where he rose to be CFO in 1997 – and a brief stint at Oracle in the same position, and five years as CEO of 360networks, before joining the Liberty group in 2006. According to GMI Ratings Global LeaderBoard, his current positions – if mapped on a social network site – would make a spider's web look like child's play. Not only is he CEO at Liberty Media, he is also CEO at Liberty Interactive (NASDAQ: QVCA) , Liberty Ventures (NASDAQ: LVNTA) , chairman at Starz, Tripadvisor (NASDAQ: TRIP) , Sirius XM Radio, and Live Nation Entertainment (NYSE: LYV) , and a director at Barnes & Noble, Charter Communications (NASDAQ: CHTR) , and Zillow, and has only just stepped down from a 10-year stint as a director of Electronic Arts. The idea that any one person could properly fulfill the demands of this many jobs is, frankly, preposterous.

Yet the cause of this situation is the even more complex network of Liberty chairman John Malone. And this is where the similarities with Zuckerberg and Kinder do arise. Malone, co-founder, sometimes chairman, and sometimes former CEO, is the controlling shareholder at most of the companies with which Maffei is associated, through multiple classes of stock that give 10 votes per share to the shares he owns, and only one to the shares owned by the public. In many cases, Malone controls more than 33% of each of these companies' total voting power. Thus we see again that control goes with high compensation.

The origins of the $391 million

Maffei's pay comes – and this is hardly a surprise – from two sources: his positions as CEO of Liberty Media and CEO of Liberty Interactive/Starz/Ventures. At Liberty Media, he earned $255 million, while as CEO of the other group he earned $136 million.

Most of this vast amount of compensation comes from profits on stock options. Maffei earned more than $250 million on the exercise of 3.1 million options at Liberty Media. As head of Liberty Interactive/Ventures/etc., Maffei exercised 12.3 million options, making a profit of more than $132 million. The exercise of these options took place in 2012 because of what the companies called an "option modification program" that essentially was a tax avoidance program. At the end of 2012, if you remember, we were poised on another fiscal cliff, and, according to the companies, there were predictions of a lower corporation tax. Profits from stock options are treated as an ordinary expense and therefore can be deducted against corporation tax. By ensuring that the options were exercised in 2012, the companies benefited from a higher deduction.

But there's more. The remuneration report in the proxy statement takes care not to mention this, but we also remember that there were fears that the highest rate of income tax would also increase significantly, so not only were the companies exploiting corporation tax deductions, they and Maffei were also exploiting income tax rates. Some might call this good business practice. I call it tax avoidance.

His pay from each of these companies also included base salaries of around $800,000 and bonuses of around $2.5 million. At each of these companies, he also registered personal use of corporate aircraft of around $200,000 each.

Has Gregory Maffei earned his pay?

Frankly, the performance – measured by stock price – of each of the companies of which he is CEO has been very good during his tenure, though only the performance of Starz, where he has been chairman since 2011, has seriously outstripped its peers. All the other companies where he is CEO have fundamentally tracked their entertainment industry peers.

But when you are awarded this many stock options (after exercising 15.4 million options in 2012, he received another 2 million from Liberty Media and 7.7 million from the other Liberty companies, not even counting the restricted stock awards), it is almost impossible not to make enormous profits so long as the stock price increases, even by small amounts.

What is needed here is some measure of outperformance of a peer index. What makes investors become shareholders in a particular company is its outperformance of its peers. In order to truly align management with shareholders, they should only receive incentives if they outperform their peers. But at none of these companies is Maffei's pay tied to such outperformance in the long-term.

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I'm very much against outrageous CEO pay. The last 30 years have added excess to excess. But if there is anyone who deserves high rewards (though perhaps not this high), it is Greg Maffei.

You write: "All the other companies where he is CEO have fundamentally tracked their entertainment industry peers." I have substantially different data here, suggesting that LMCA has provided returns of something like 35% a year since 2008. Maffei and John Malone via LMCA bailed out SIRI. Anyone could have purchased even after their recap of SIRI in 2009 and made easily 10x their money (In short, you didn't have to buy at the nickel SIRI was trading at before LMCA bailed it out). This is tremendous value creation for shareholders, both at SIRI and LMCA.

And while a dual-class share structure may be a license to rob shareholders at OTHER companies, Malone has credibly handled his responsibility here. I'd prefer he have substantial control of his companies. His track record over his first 25 years is unparalleled (30% annually), beating even Buffett's in his first 25 years (25%). Maffei understands the Malone game plan.

The performance of these guys (Maffei and Malone) stands in STARK contrast to virtually the rest of corporate America, where exorbitant pay comes WITHOUT exorbitant performance. At the very least, these guys deliver the goods to shareholders year after year. Contrast this with Mel Karmazin and SIRI's stock performance over his tenure, pre-Malone.

I have no problem with Maffei and Malone being paid at the highest echelons for their performance (a relative measure). But as I said at the top, we should be debating what's in fact a reasonable rate (an absolute measure).